Vulcan may earn an 85% working interest before payout and a 75% working interest after payout by paying $400,000 cash and 100% of the drilling, completing and equipping costs of 16 wells. A further 10 wells on the lands would be at 75% cost to Vulcan.
Underlying encumbrances in the lands amount to 10% overriding royalties. The $400,000 cash portion of the transaction includes the purchase and re-completion of two shut-in existing wells, both believed to be capable of commercial production of gas with proper stimulation. Five new wells are to be drilled prior to August 8, 2006, as per Phase I of the project at an estimated cost of $1.5 million.
The lands cover a portion of the prolific Medicine Hat gas field and specifically include the rights to the Medicine Hat sands in an area of bypassed pay. A preliminary Resource Potential Assessment has been prepared by Chapman Engineering Ltd. of Calgary pursuant to National Instrument 51-101 and concludes that the total project has a Best Estimate of Potential Recoverable Gas in Place of 20.9 BCF, a Low Estimate of 6.9 BCF, and a High Estimate of 49.5 BCF based on historic data from offsetting production.
Vulcan's share would be 85% before payout and 75% after payout as described above. Total costs to Vulcan for a complete 26-well package is estimated at $7 million. Vulcan's participation in the complete package of wells is contingent on results. The risks to recovering commercial gas from the lands relate to reservoir quality and the efficiency of hydraulic fracture stimulation of the reservoir as described in the Chapman report. A copy of this report is being finalized and will be filed with Sedar and available on the company's website when finalized. A finder's fee in the amount of a 1% gross overriding royalty before payout and a 2% gross overriding royalty after payout is payable to an arms-length party on the company's working interest share.
The company has sufficient funds to carry out Phase I of the project and will finance further expenditures from cash flow and or additional equity or debt financing. The agreement is subject to approval by the TSX Venture Exchange.
This acquisition will complement the company's ongoing exploration activities in Western Newfoundland by providing a source of cash flow that will reduce future dilution to finance activities in Western Newfoundland. It will not diminish the company's confidence and resolve to advance the onshore Western Newfoundland petroleum project and the high-impact rewards that the project can potentially deliver. An update on Western Newfoundland will be issued shortly.
Vulcan proposes to issue 650,000 incentive stock options to directors exercisable at $0.40 for a period of 5 years and 75,000 incentive stock options to employees and consultants exercisable at $0.40 for a period of 2 years, subject to TSX Venture Exchange approval. It has reserved for issuance 3,527,838 shares pursuant to its stock option plan of which 2,686,250 have been granted, including the grant described herein.
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